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SPOTIFY CFO SPELLS OUT PODCAST STRATEGY

Spotify CFO Barry McCarthy tells the Wall Street Journal that current negotiations with labels will not be a boon to investors the way the last talks were. Instead, the goal is to create opportunities that create better margins, much of which is expected to come from podcasts.

During the last round of negotiations, McCarthy says, “it was in the labels’ self-interest to allow the margins to increase to a point where the business could be self-sustaining, to ensure economic viability. This time around we’re looking for an evolution in the terms of the business relationships that allow us to do things like advertising on podcasts and two-sided marketplace, all of which weren’t envisioned when the label agreements were originally negotiated. If we’re successful at those things, we’ll see margins improve over time. But first we need to amend the contracts to put ourselves in a position that we can continue to pursue those opportunities. That’s what this round of label negotiations is about.”

The solution in creating growth opportunities follow the same idea he used at Netflix: Shift cost structure from variable to fixed. The answer is podcasts.

“For Spotify, the investment is in podcasts,” he tells the Journal. “Original podcasting content for Spotify comes with a fixed cost, just like the streaming investment for Netflix came with a fixed cost, and over time, as it became a large percentage of the business, it shifted the Netflix cost structure from variable to fixed. That had some profound implications for the evolution of that business model. It remains to be seen what the margin implications will be for Spotify’s business. Importantly, it creates for us the opportunity to have exclusive content, which isn’t an opportunity that exists in music.”

McCarthy says the metrics show that podcasts will eventually become at least 20% of content streamed on the platform. It’s why they’re committed to continues investment and “working aggressively to increase user engagement with the content on the platform.”

And since the majors have pooh-poohed exclusives, they can use that in the podcast world where it’s tough on the music side.

While Apple has been the #1 source of podcasts, McCarthy sees Spotify’s advantage being its ability to sell ads., which Apple does not do. Polus, podcast listeners are not mutually exclusive to music listeners.

“What we are seeing is that users who engage with podcasts engage significantly more on the platform, and not only do they consume podcasts, but they consume more music.”

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